Crowdfunding is, in my opinion, one of the most exciting fields in fintech, and even though the field has had a slow start in Norway compared to other countries, the segment is now blooming. What are the problems that the solutions aim to solve, where is the market heading, and is a threat or a supplement to traditional financial services?
In order to answer these questions, it is useful to take some steps back and first refresh the various kinds of crowdfunding, as they aim to solve different problems and have different characteristics.
Donation-based based crowdfunding is the simplest form of crowdfunding. Individuals are encouraged to support a cause through a crowdfunding platform. This could be a charitable cause or a community project. The contributor receives nothing in return for the donation.
Reward-based crowdfunding allows individuals to contribute to a product or projects while being rewarded with the said product when it is realized. This kind of crowdfunding is widely used by creative projects such as music and literature and is widely known through the popularity of the global platform, Kickstarter. Notable Norwegian companies in the donation- and reward-based categories are Spleis by SpareBank 1, Sponsor.me, bidra.no and Startskudd by DNB.
Crowdlending makes things more interesting. Where the first two forms of crowdfunding are based on at least a portion of idealism, crowdlending is all about return on equity. Crowdlending platforms allow private investors to invest directly in loans, either as unsecured loans to other private individuals or as small business loans to companies in need of capital. Crowdlending platforms offer several benefits to the various stakeholders on both sides of the platform. For potential investors, investments through a crowdlending platform offer an asset class that differs from those traditionally available for retail investors. The possibility of investing directly in loans may be seen as a democratization of the debt-investment market as similar assets historically have only been available for institutional investors, family offices, and similar. Notable Norwegian crowdlending companies are Monner, Kredd, FundingPartner, Kameo, and Perx.
Equity-based crowdfunding allows individuals to invest in companies as equity investors and receive shares in the company seeking capital. Notable Norwegian companies (limited to those with a license or a pending license from the Norwegian FSA) are Dealflow and Monner.
According to the Norwegian crowdfunding Association crowdfunding as a whole had a significant boost in capital raised in 2018 with a total of 205 MNOK raised throughout the various categories of crowdfunding. Compared to 2017, where crowdfunding amounted for 94 MNOK in capital raised, this shows a growth of 118%.
Crowdlending experienced the highest growth rate with 324% growth with 71,5 MNOK in 2018 compared to 17 MNOK 2017. This is followed by equity-based crowdfunding which grew by 306% from 13,7 MNOK in 2017 to 55,5 MNOK in 2018. Donation-based crowdfunding may look moderate compared to the two previous categories, but a growth of 48% from 42,3 MNOK in 2017 to 62,6 MNOK in 2018 also shows promise. The only category that saw diminishing numbers is donation-based crowdfunding, which saw a reduction of 26% from 21 MNOK in 2017 to 16 MNOK in 2018. This continues a decline for donation-based crowdfunding which peaked in 2016 at 37,6 MNOK.
With rapid growth, Norway is still behind some of the more mature markets for crowdfunding, but the future looks bright for the sector to grow further. The implementation of debt registry in Norway will give both banks and crowdlending companies aimed at consumer loans better insight on borrower’s financial status. Regulations have for a long time been the biggest obstacle for crowdfunding in Norway, and while Norway still imposes some of the strictest requirements on crowdfunding in the EU, with an investment limit on 1 MNOK for private investors, the regulatory landscape is at least becoming more predictable.
With PSD2 coming into effect just around the corner, potential changing user behavior in the wake of the directive could benefit crowdfunding companies as it becomes easier for consumers to “shop around” for financial services. For crowdfunding companies with a license, the ability to act as a PISP under PSD2 will also reduce friction when transferring money to the platform as well as enable access to transaction data for credit scoring.
There are still several unknown factors in plays, and one wildcard in the regulatory equation is whether the regulatory sandbox will benefit crowdfunding companies.
Crowdfunding is without a doubt here to stay, and what makes crowdfunding appealing for me is that it represent a business model innovation. This fact provides both opportunities and threats to the banking sector.
Donation– and reward-based crowdfunding may live alongside traditional financial products, as it represents something on the side of traditional banking products.
Equity-based crowdfunding in its current state solves an inefficiency in the market by catering to a previously underserved segment. However, it has all the characteristics of disruptive innovation, and will most likely move up the value chain towards bigger deals and challenge the corporate finance sector.
Crowdlending is a double-edged blade for incumbents. While crowdlending for small business loans acts as a supplement to traditional credit products, crowdlending for consumer loans is a head-on attack on one of the most profitable products in banking. With little- to no legacy, crowdlending platforms may provide cost-efficient loan origination where both investors receive premium returns as well as providing loans at a lower interest rate to borrowers. How this plays out remains to see and at the end of the day, it all comes down to user attraction and the ability to keep user acquisition costs low.
In the case of both equity-based crowdfunding and crowdlending, these paltforms provide an alternative asset class that may challenge both deposits as well as funds under management for incumbent banks and asset managers. Looking no further than across the border to Sweden, crowdfunding company Lendify announced that they have received 1 billion SEK of institutional capital to fund loans on the platform.
Whether you as a bank are actively involved or remain on the fence, this area is moving at a pace where it is wise to pay attention. Jeff Bezos is reported to have said, your margin is my opportunity, and this is from my perspective what parts of the crowdfunding sector are aiming for.
Just as banks are starting to become comfortable with fintech startups as potential innovation partners rather than disruptors, a new breed of fintechs are targeting retail banks primary cash cow, mortgages.
Even though there is a fintech for every aspect of a bank, few have posed a substantial threat to the core business model of banking. Much of the focus has been directed at transactional revenues, unbundling of traditional banks and targeting the underbanked for financial inclusion. P2P-lenders were initially set to compete with banks, but have proven to act as a supplement to traditional bank loans. Even comparison sites such as now discontinued Google Mortgage and Moneysupermarket has acted as an extension to the mortgage process as we know it.
This has led to a sense of comfort among incumbents, as the challengers have been primarily focusing on around the fringes of the banks business models. However, this is starting to change, as an increasing amount of non-bank challengers are taking on mortgages.
Even though this reduces friction in markets where loan origination and mortgage applications are time-consuming and riddled with paperwork, the mortgage provider will still be a traditional bank. For incumbents, this has acted as a comforting fact when analyzing the potential threat from fintechs. While nimble startups may excel at both delivering a smooth customer experience as well as lower operating cost, they will have difficulty competing with the banks on providing loans at competitive rates, due to the lack of a banking license.
However, a new breed of non-bank lenders are challenging this established truths by offering mortgages at rates below traditional banks, without having a banking license. Instead of collaborating with banks and providing a superior loan origination experience, they are bypassing the banks completely by setting up dedicated mortgage funds, largely funded by pension funds and insurers.
Closer to home, a trio of Swedish startups are attacking the mortgage market head-on with Stabello which is backed by Avanza, Hypoteket from Schibsted, and Enkla which launched earlier this year, which aims to manage 100 billion SEK within 18 months after launch. As a reference, they received 2 billion SEK during their first 24 hours of operation. Enkla promises to offer mortgages at a 0.95% fixed mortgage rate for three years. The average mortgage rate from major banks in Sweden is 1,6% according to Di Digital.
According to an interview with Breakit.se, this is made possible by several factors. Enkla operates through a fully automated process and only accepts refinancing of existing loans in order to cherry-pick customers that have already passed a credit scoring by incumbents. Furthermore, in a low-interest environment, capital is almost free, and mortgage-backed securities are attractive for long-term institutional investors.
In fact, all of the Swedish challengers are relying on financing from institutional investors through mortgage-backed securities rather than covered bonds, which make up the incumbent source of external capital. While the cost of capital through Residential Mortgage-Backed Securities enables may be competitive in a low-interest scenario, it remains to see if it is sustainable in the long run. Experts are a bit skeptical and somewhat divided on the realism of Enklas growth projections.
While a lot of the focus on fintech has been centered on the technology, it is those who manage to challenge the business model of an existing industry that tends to shake things up among incumbents. The jury is still out on whether these players will pose a significant threat to the banks in the long run, but I for one will pay close attention to this development.
This is a guest post by TheFactory FinTech Accelerator. Sbanken is a partner of TheFactory.
The Nordic fintech scene is growing fast in terms of number of startups and investments and innovative and ambitious startups are popping up in all of the major cities.
TheFactory – a Nordic Fintech accelerator and incubator based in Oslo, Norway, is observing the scene closely. Running 12-week accelerator programs tailored to fintech startups, TheFactory helps participating startups go to market faster.
The aim of the accelerator is to help ambitious Fintech entrepreneurs off to a good start.
Starting and launching a successful fintech is an immense exercise, in particular due to heavy regulation and the complexity of the landscape. Startups approaching TheFactory are typically in the seed stage and one of two kinds. The entrepreneurs either have industry experience but lack startup experience or visa versa.
TheFactory has built a versatile rig of more than 20 partners, 120+ mentors and 25 investors to help startups bridge the gaps. We find that acceleration typically occurs when you couple industry experience with outside thinkers. For example when a team of young and bold entrepreneurs is matched with a mentor that knows the banking or insurance business in and out and can guide them right and open doors to the decision makers. Similarly, when a team of industry dropouts – now entrepreneurs – are coupled with design thinkers and agile developers.
Leveling the playing field throughout the accelerator programs, TheFactory facilitates meetings and interactive workshops between the startups and the established industry. A few years ago it would be unthinkable for an early stage startup to spend time with top level management of a bank. But times are changing. Banks and Insurance companies are coming to realize that they are forced to innovate to stay in business, and more and more they are looking to source innovation through ecosystem partnerships. The startups on the other side often seek industry partnerships to get distribution fast.
At TheFactory, the startups get a chance to meet the decision makers face to face. Previous participants met with the CDO of Sbanken, Christoffer O. Hernæs who came to share insights on the banks open innovation efforts. Nordea’s CEO, Casper von Koskull came for lunch – eating hotdogs with the entrepreneurs.
TheFactory is open for applications through August 3rd. Startups seeking industry partnerships, mentoring and seed investments are encouraged to apply. For more info and application see www.thefactory.no
Fintech has in a few years grown from a narrow area of interest to become one of the hottest topics in Norway. With an already digital and cost-efficient banking sector, all the prerequisites are in place to succeed in establishing and scaling the next generation of digital banking services. Norway is repeatedly ranked as having the leading digital infrastructure and internet and smartphone penetration is close to 100%. Consumers are early adopters of digital services, and the society is characterized by high levels of trust. A widespread use of digital identity solutions provides easy access to secure and user-friendly digital services. With a tradition to collaborate where it is possible and compete where it is necessary the stage is set for the next wave of fintech from Norway.
However, the competitive landscape have changed, and the incumbent banks are no longer the only ones dictating how the face of digital banks should be. Fintech startups have entered the playing field, challenged the banks way of work, and raised the stakes for competition. While some fintechs such as Klarna have established themselves as actual challengers to the incumbent banks’ sovereignty over financial services, most fintechs are experiencing limited consumer adoption. As a result, a majority of the fintechs are collaborating with incumbent banks in order to leverage best of breed in the competition for the hearts and wallets of the banking customers.
Whether the customers are looking to lend, spend or save the common denominator is trust. While the underlying products may remain the same for a while, customer interaction will change. Distribution must be contextually relevant and driven by “jobs to be done” rather than product-centric, and traditional segmentation should be replaced with personalized dialogues.
According to a survey by Kantar TNS, banks still enjoy a significant trust advantage over potential challengers from both the tech industry as well as adjacent industries. Even though Facebook is much more than a social network, the general perception is still closely connected to a social media company. Even though this is good news for the banking industry, the potential threat from challengers should not be easily dismissed. Facebook is frequently used by 3,4 million Norwegians and has already obtained a pan-European payment license. Only time will tell how they aim to utilize this.
With Facebook pay already operative in the US an obvious play is to launch this service across Europe as well, and the jury is out whether Facebook will be satisfied to provide a simple P2P payment service to create stickiness to their messenger platform or whether they are aiming to become something bigger. Facebook is already in a unique position to disintermediate retail banks as the most powerful digital ecosystem out there for consumers. The key to Facebooks powerful position is the ability to evolve alongside changing user behavior, and so far, Facebook is excelling at this.
Payments
PSD2 is by definition in effect as of January 2018, but the technical implementation is delayed and the due date for opening up for TPPS through standardized APIs is estimated to be September 2019. However, neither the financial services industry, affected industries or fintechs is sitting idle by in the payments space. Danske Bank has announced that they will pursue a preemptive strike and launch their account aggregator services through screen scraping across the Nordics already in 2018, and we should expect to see other banks also pursuing various strategies to prepare for PSD2.
Vipps has evolved from a simple P2P payment service to become the banking industry’s joint line of defense against challengers from the tech industry. A well-known brand alongside a merger with the domestic payment scheme BankAxept as well as digital identity solution BankID gives a dominating position in the Norwegian market. In addition to this, Vipps aims to launch in another European country within the year. Read more at vipps.no
Payr is not discouraged by Vipps dominance in the Norwegian market and has already raised capital and is aiming to raise more to get in on the fight for the customers’ attention. Read more at payr.no
Meawallet was acquired by Swedish fintech company Seamless and is delivering HCE and tokenization services for NFC payments and mobile wallets. Read more at meawallet.com
Auka is in Norway best known as mCASH, but after SpareBank 1 acquired the Norwegian rights of the technology, Auka is aiming to deliver turnkey payment solutions to banks across Europe. Read more at auka.io
Aera payment and identification is a joint venture by the biggest retailers in Norway providing a unified payment and identification platform for retailers. Read more at aera.id
These are just some of the players originating out of Norway, but the payment space inhabits several others providing specialized solutions such as Zeipt, a provider of digital receipts and Zwipe, a provider of biometric readers for credit cards just to name a few.
Lending
Norway has for a long time been one of the last the white spots on the map when it comes to crowdlending and is a laggard from a Nordic perspective. Several players are now set to bring alternative ending to the Norwegian market.
Monner is aiming to provide affordable loans for SMEs through crowdlending and has raised capital from SpareBank 1 SR-Bank. The team has a strong track record from banking and digital services and has developed a proprietary platform for loan origination and administration. Read more at monner.no
Funding Partner is another company aiming to fill the funding gap for SMEs through crowdlending and has developed their own credit scoring model in order calculate risk. Funding Partner has participated in DNB NXT accelerator. Read more at fundingpartner.no
Kameo has already been present in the Swedish market for a while, but entered Norway in 2017, offering crowdlending for property investments. Read more at kameo.no
Aparto is also targeting real estate investments and gives investors the opportunity to invest a fraction of rental apartments. Read more at aparto.no
Perx is aiming at the consumer lending market with their crowdlending platform, promising to deliver unsecured loans at half the cost as the established players. Read more at perx.no
In addition to the crowdlending platforms, there are several reward-based crowdfunding platforms in the market such as bidra.no, funde.no and Spleis by SpareBank 1 just no name a few.
However, one of the reasons that Norway is falling behind our Nordic Peers are due to regulatory constraints, primarily limitations on the investor side where investments made though a crowdlending platform may be considered licensable lending. For further reading, he financial supervisory authority of Norway has provided this handy guide to crowdlending in Norway. ICT Norway and Selmer has also made a fintech regulatory guide, which introduces financial regulations in Norway in a user friendly way.
Loan origination at the incumbent banks is also highly digitized, and collaboration between the banks and the public sector provides banks the necessary data for fully digital no-touch mortgage processes.
Savings and investments
This is where things start getting interesting. With an aging population and increased awareness towards long-term savings, both banks and fintechs are promising to make savings easy to understand and less boring. With advancements in machine learning and opportunities created by new regulations, the stage is set to deliver the best savings and investment service.
Min Sparing from Sbanken gives an overview of more than 400 mutual funds, stocks and savings accounts through an open platform. Building the leading robo-advisory service based on a turnkey robo-investment platform by Quantfolio Sbanken is set to democratize wealth creation. Download the app and get started here.
Spare from DNB aims to be the one-stop solution for all your savings and aim to make savings both easy and understandable. Read more at dnb.no
Spiff is a household name in the Norwegian fintech space. Aiming to make savings fun and accessible, Spiff has partnered with Nordea and BN Bank. Read more at spiff.no
Dreams originate from Sweden, but has entered the Norwegian market through a strategic investment by Storebrand. Similar to previous entries, Dreams is based on behavioral psychology to encourage people to save more. Read more at getdreams.com
Kron is a subsidiary of wealth manager, Formuesforvaltning. Based on a digital platform, Kron aims to offer investment advice to the affluent segment. Read more at kron.no
Quantfolio has developed a turnkey robo-investment solution based on quantitative analysis for banks and wealth managers looking to provide robo-advisory services. In addition to this, Quantfolio delivers Macro AI analytics to asset managers, family offices and private investors as a service. Read more at quantfol.io/
Fronteer Solutions has developed the quantitative investment fund Harvest.online. read more at fronteeersolutions.com
Huddlestock promise to giver ordinary investors access to the same tools and strategies as hedge funds through their platform. Read more at www.huddlestock.com
Looking outside of Norway, robo-advice has already had a significant impact on the wealth management industry. Several wealth managers have already launched a robo-advice option; others have an option in development or are reviewing strategic alternatives. It will accelerate the fee compression in the industry, together with other trends such as passive investing. Wealth management firms need to keep a close eye on operating costs and on ways to automate transactions and processes that are currently performed manually.
On a more positive note, robo-advice will also give wealth managers access to a large new market of millennials who are interested in accumulating wealth, but have had only limited options in terms of investment management. As these individuals mature and build assets they represent a significant growth opportunity for banks and wealth managers.
Open Banking
With PSD2 in effect (at least in theory), a majority of Norwegian banks are lining up to open up their platforms in due time before the regulatory standards require them to do so, forever changing the digital banking landscape as we know it. Sbanken is the first one to open up, and through our developer portal hundreds of developers/customers are now developing their own online banking solutions based on the banks APIs.
The rest of the banks are also on the verge of opening up and provided some insight in their plans for open APIs at Oslo Startup Day: PSD2 earlier this year.
As a result, the Norwegian fintech ecosystem is really shaping up. Access to capital is plentiful with VCs like Alliance Venture, Northzone, and Investinor with a track record in investing in (and exiting) fintech. Banks like SpareBank 1 SR-Bank and DNB are establishing investment funds on 250 MNOK each to invest in the next generation of digital banking services. Banks like Sbanken has made strategic investments in turnkey fintech solutions. For aspiring fintech entrepreneurs, accelerator programs like The Factory and DNB NXT give a flying start in establishing a company, and access to open APIs gives fintech access to relevant bank data. Support organizations like IKT Norge and Finans Norge are working towards establishing a regulatory sandbox, thus lowering the threshold to get started. In addition to this, key players in the industry have established a fintech cluster, Finance Innovation in order to launch new initiatives in research, education, innovation infrastructure, and internationalization. Summarized, the prerequisites for fintech in Norway has never been better.
We are building the next generation financial application aimed at millennials, promoting financial inclusion – built on blockchain powered by AI all available through state of the art APIs. Everyone has heard this pitch from at least one fintech. How should banks and investors look beyond the hype to distinguish substantial companies from empty promises?
The obvious place to start is the value proposition. Is the company aiming to solve an actual problem, or is it a solution looking for a problem. No matter how much cutting-edge technology that is under the hood, it is useless unless there exists a tangible customer problem.
What is the business model? Even if there is a problem to be solved, how is the company planning to earn money? Disruptive innovation often means attacking the incumbent industry’s profit margins. How sustainable is the proposed business model? Are you merely drawing first blood in a downward spiral where margins move closer to zero for every day? For many aiming directly at consumers, it is all about building a user base first and monetizing later. Is there a plan that states when and how you will be able to monetize the user base. What is the customer acquisition cost, and are there any wildcards that may mess up the assumptions in your business case?
Further on, is the business case based on assumption beyond the company’s control? This is seen by some fintechs that have placed a bet on establishing a position pre-PSD2 and then challenging the incumbent banks head-on. For every day the regulatory technical standards are delayed, the distance towards the company’s final form is prolonged.
How many customers are required to gain the necessary scale to be profitable? Many challenger banks are competing for the attention of the same target audience by offering an app-only everyday bank with an accompanying credit card. While this may offer convenience to the customers, Monzo reported that its prepaid card scheme loses around £50 per active customer per year, and other digital banks face similar challenges.
The key question is how the company is going to make money. Is it a B2C play, or a B2B-play? For the B2C-companies out there, will the company own their own balance sheet or base the business case on transactional revenues? Is it even possible to create a scalable revenue stream without relying on net interest income? For fintechs positioning themselves B2B it is easier to identify potential business models, as these will be similar to traditional banking software vendors.
Another area to investigate is the use of the underlying technology. The reason behind the success for several fintechs is clever use of technology to solve a customer problem. Neither blockchain nor AI as a magic wand that makes all the inherent problems of the financial industry go away.
For companies claiming to base their platform on blockchain or distributed ledger technology, it is useful to assess whether this is even necessary. There are many use cases for blockchain that is just as easily solved with a traditional database. One relevant questions to ask is if there is a need to establish trust between multiple stakeholders.
AI is no single discipline, but a collective term describing a wide array of disciplines that may prove to be useful. The most common area in fintech and banking is machine learning, e.g. having a computer program learn from examples rather than explicitly telling the program what to do. This is useful in any context where it is required to process a large amount of data to look for patterns such as Anti Money Laundering (AML), quantitative analysis or analyzing customer behavior. Natural Language Processing (NLP) is the backbone for the development of chatbots, and image recognition is useful for cybersecurity and Know Your Customer (KYC).
Access to relevant data is another area that is crucial for most companies. Even though the banking industry is set on open banking, there is no such thing as a free lunch. PSD2 is delayed and staying compliant with GDPR, reducing operational risk and securing customer data will always win over opening up APIs to third parties.
Does the team have the necessary experience that is required to build and run a fintech company? I have previously argued that being an entrepreneur is hard, but being a fintech entrepreneur is a whole new level of self-inflicted pain. The team should have the necessary skills in both finance, commercial, technology, and compliance. Even though one might be able to think out of the box by having a team with little to no experience from financial services, the financial industry is in many cases boxed in by compliance.
Is the company sufficiently aware of the cost of doing business from a compliance perspective? Financial regulations are constantly evolving, and it is easy to underestimate the cost of doing business in the long run. No matter how troublesome compliance may seem, as long as a company is handling other peoples finances, financial regulations are here for a reason.
For potential investors, fintech valuations are often cumbersome. Market trends show that deal volume has declined some, but remain at a relatively high plateau in terms of number of deals. Late stage valuations have experienced a drop and remain low as the sector matures. Despite this, early stage (early venture, seed and angel investments) valuations are steadily increasing. For potential investors, there are a couple of obvious pitfalls to avoid. What are the value object(s) of the company at hand and how sound are the assumptions that make up the business case? If either of these are unclear, it is better to stay away and place your investment elsewhere.
At the end of the day, a simple checklist-based approach may be the most useful:
Is the company solving a real problem?
Is the business model sustainable?
Is the company earning money or is there a concrete plan for when to start earning?
Is the underlying technology contributing to the product?
Does the team have the necessary experience both commercial, financial and technical?
Which regulations are relevant, and has the company taken this into account?
If there is a good answer to all these, then you may move further in your dialogue, either as a customer or investor.
This blog post was originally published in Dagens Næringsliv (in Norwegian)
Fra en beskjeden start for kun få år siden har norsk finansteknologi (fintech) blitt et sentralt tema i videreutviklingen av norsk finansnæring. Kombinasjonen av regulatoriske endringer som krever at bankene tilgjengeliggjør deler av sin betalingsinfrastruktur for tredjeparter gjennom betalingsdirektivet PSD2, endringer i kundenes forventninger og adferd og mulighetene som ligger i ny teknologi utgjør en perfekt storm som driver frem behovet for endringer i bransjen.
Den gode nyheten er at bransjen ikke sitter stille og ser på at dette toget går, men samtlige aktører tar ulike aktive grep for å være med på utviklingen. Sbanken har investert i Quantfolio som leverer kunstig intelligens til robotrådgivning. SpareBank 1 SR-Bank har også investert i flere selskaper som kan utfordre og videreutvikle egen forretningsmodell, samt har annonsert at de vil etablere et dedikert venturefond på 250 MNOK for å investere i finansteknologi i Norden.
Etableringen av en ny næringsklynge for fintech I Bergen har som ambisjon å gjøre Norge ledende på fintech, og en rapport utarbeidet av Menon på oppdrag fra Sparebanken Vest tidligere i år konkluderer med at Norge har et enormt eksportpotensiale innen fintech. Tjenester som BankID er lett å ta for gitt her i Norge, men representerer en betydelig innovasjon for tjenester som baserer seg for sikker identifikasjon og autentisering som kan kommersialiseres og eksporteres. Målet med klyngen er å styrke et allerede eksisterende samarbeid mellom aktørene i bransjen fr å ta en ledende posisjon på et område der Norge allerede ligger i front.
Vipps har raskt gått fra å være en løsning fra én bank til en felles front for norske banker i møte med trusselen fra utenlandske giganter som Amazon og Facebook. Selv om ingen av disse er banker i dag, trenger de nødvendigvis ikke heler bli det for å utfordre bankene i fremtiden.
Amazon har samme utgangspunkt i USA og Vest Europa til å følge suksessen til Alipay i Kina og Sør-øst Asia og kan allerede vise til sterk vekst innen betalingsområdet. Med 33 millioner aktive månedlige brukere av Amazons betalingstjenester og 200% vekst i brukersteder som tar i bruk Amazon sin betalingsløsning er ambisjonen tydelig. Til sammenligning har Alipay mer enn 250 millioner aktive brukere og kontrollerer over 50% av online betalinger i Kina. Men det er ikke betalinger isolert sett som utgjør den store trusselen for etablerte aktører. Majoriteten av inntektene til bankene kommer fra rentemarginer, og det er her Amazon og Alipay skiller seg fra andre teknologiselskaper som Facebook og Apple. I likhet med Alipay har Amazon utvidet leverandørfinansieringsvirksomheten for å yte kreditt til SMB segmentet. I følge Amazon selv har Amazons utlånsdivisjon utstedt over 1,5 milliard dollar i lån og har en utestående balanse på over 400 millioner dollar.
Facebook har allerede konsesjon for å drive betalingsformidlingstjenester i Europa, og når PSD2 trer i kraft vil Facebook kunne la brukere se saldo og utføre betalinger direkte i en av Facebooks tjenester. Med 3,4 millioner brukere i Norge har Facebook et unikt utgangspunkt til å utfordre bankenes kontroll over kundegrensesnittet. Bankene fortsatt har høy tillit hos forbrukerne sammenlignet med aktører som Facebook, men adopsjonen av digitale tjenester viser at den beste kundeopplevelsen avgjør hvem som gjør seg fortjent til kundenes oppmerksomhet.
Høy digital modenhet, et godt samhandlingsklima og enighet om en felles betalingsløsning i Vipps betyr på ingen måte at bankene er ferdig digitalisert. Selv om norske banker har vært tilstede på nett siden Europas første nettbank ble lansert på Hedmark, vitner brukergrensesnittet fortsatt om inkrementelle justeringer fra den gang bankene satt strøm på den papirbaserte kontoutskriften og betalingsblanketten. Standarden for digitale brukeropplevelser settes av startups og globale teknologiselskap, og det er ikke lenger godt nok å tilby en nettbank som i sin tid var et bedre alternativ til å møte opp i filialen for å betale regningene. Majoriteten av interaksjonen med banken foregår i dag via mobiltelefonen, og for morgendagens kunder vil den tradisjonelle nettbanken oppleves som irrelevant og utdatert.
For å møte denne utviklingen må aktørene i bransjen samhandle der vi kan og konkurrere når vi må. Vi må evne å utfordre etablerte sannheter og i større grad eksperimentere med både nye forretningsmodeller og differensierte kundeopplevelser.
Ever since I started analyzing how technology and new business models would significantly impact financial services, I’ve been eager to put that knowledge into action. Now that I’m in position that enables me to do that I need to focus mye time accordingly.
In my time focusing on fintech I have transitioned from a management consultant, to VP of innovation of strategy at SpareBank 1 to now been responsible for business development, innovation and IT as Chief Digital Officer at Skandiabanken. Going forward my focus will be:
Open banking will define the financial service industry in the future, and we will do our part. This development emerges out of a perfect storm of shifting customer behavior, regulatory changes, the threat from digital ecosystems such as Google, Apple, Facebook and Amazon, and the quest for new business models are driving banks towards the inevitability of open banking or banking as a platform. APIs are at the heart of open banking. If executed correctly propose to increase innovation, foster collaboration, extend customer reach and lower costs compared to existing legacy systems. Key concepts in open banking is to use open source technologies to enable third-party developers to build financial applications on top of the banks’ existing infrastructure as well as integrating third party data in the digital services available at the bank.
Democratizing wealth creation. Through our stake in Quantfolio we aim to build and launch the frst and leading robo advisory platform in Norway, while at the same time leverage this success story to accelerate Quantfolio as the leading vendor of turnkey AI investments components for banks and wealth managers across Europe. Through machine learning algorithms, Quantfolios solution provide automated, sophisticated AI advice to a wide range of banking customers. As chair of the board in Quantfolio I look forward to participate in this journey. Download our savings app to get access to our robo advisor as soon as it launches.
SMEs have long been an underserved segment, lacking good digital solutions, access to capital and attention from banks. In the second quarter of 2018, Skandiabanken will exoand our reach to launch a digital only offering for SMEs of the future. Make sure to sign up to get early access here.
The landscape for payments is constantly evolving. In order to base decisions on facts and qualified assumptions, it is important to have a map that matches the terrain. Will the endgame be a fragmentation or a consolidation? How and when will non-banking players enter the playing field, and what is the end game for payments? From a banking perspective, payments is a central component in the customer relationship, where a significant share of the customer interaction is through payments and transactions.
A core banking solution rigged for the future is crucial to stay competitive in a digital banking world. Utilizing a cost efficient national digital infrastructure and standard solutions for commoditized areas is key to keeping IT cost low. This requires a constant focus on re-evaluating previous strategic choices as yesterday’s differentiator is the commodity of tomorrow. In addition to scale and cost efficiency, it is equally important to maintain a flexible architecture that acts as a catalyst for innovation and enables short time to market for new solutions and services.
Compliance. You cannot work in a bank without dealing with compliance. With PSD2, banks are required to open up their infrastructure. In short, the directive states that banks need to offer payment APIs to third party-providers of financial services, also known as TPPs (Third Party Provider) under the XS2A (Access to account) rule.
Pursuing a traditional compliance approach to PSD2 sets banks at risk of becoming mere utilities, while ownership of the customer relationship shifts to third parties. PSD2 is also expected to increase IT cost as well as reduce retail payment revenues. Despite the concerns, PSD2 acts as a catalyst for open banking, and should be viewed as an opportunity for incumbents.
The wealth and asset management space in Norway will soon have to adopt to MifID II and Retail Distribution Review (RDR). Key takeaways from the UK market shows that the implementation of RDR has led to an advisory gap, leaving 5,5 million banking customer “underadvised”. This strongly favors self-service platforms and players such as Nutmeg has seem tremendous growth following the implementation of RDR in 2013.
GDPR is set to come into effect sometime in 2018 and require all organizations in the EU to comply to strict guidelines when it comes to consumer data and privacy. The rules will strengthen individuals’ property rights over their own data, and hold businesses accountable for the use of data so that digital solutions are designed with privacy as a integral principle. Among the requirements is the “right to be forgotten” – where users always have the right to withdraw his or hers consent to use personal data, and data portability – where the user can export and transfer their data to alternative suppliers of choice. If not compliant to this regulation, companies risk to be faced with fines by up to four percent of a company’s global revenues.
Fintech cluster. Last week we recieved the official news that Finance Innovation is acknwlodged as Norways first industry cluster for fintech. The cluster will act as a catalyst to launch new initiatives in research, education, innovation infrastructure and internationalization, and is the result of a joint effort between more than 20 banks and tech companies in Bergen that have aligned to create a fintech hub to push a global innovation agenda amid growing collaboration between banks and startups in Norway.
These are just some of the areas that take up my time and attention these days. Being a listed company in a competitive environment, I can unfortunately only share what is already official information or insight based on public available sources.
With this in mind, even I have to acknowledge my own limitations and focus my time going forward. As a result I will reduce the frequency and predictability of my blog posts. I will still share my insights and opinions on my blog, but not as often and not as predictable. Make sure to subscribe to my updates in order to get the latest news when I find the time to post news.
Banking is necessary, banks are not was stated by Bill Gates all the way back in 1994, and has served as the mantra for the first wave of fintech. Following the Silicon Valley obsession of disrupting incumbent industries, numerous fintechs were ready to challenge every aspect of banking and deliver better banking services directly to consumers. Armed with the recent Millennial disruption index, where 71% of respondents claimed to rather visit the dentist than listen to their bank everyone was convinced that the days of incumbent banks were numbered.
As the sector matured, something else happened. Customer willingness to switch away from incumbents has been overestimated. Customer switching costs are high, and the perceived usefulness of innovations has proven insufficient to warrant a shift from incumbent service providers. Fintechs have also struggled to create new infrastructure and establish new financial services ecosystems, such as alternative payment rails or alternative capital markets. They have been much more successful in making improvements within traditional ecosystems and infrastructure.
As a result, rather than eating the incumbents lunch, banks and fintechs sat down to eat lunch together, acknowledging that collaboration allows both parties to benefit from complementary strengths and weaknesses between banks and fintechs. On the one hand, fintechs are agile and innovative. On the other, banks have consumer trust, familiar brands, large distribution networks and a well-equipped war chest. Collaboration between banks and fintechs should therefore be a win-win, improving the incumbent’s capacity for innovation and giving the fintechs scale and route to market. As a result we see weekly announces of banks collaborating with fintechs in order to boost their innovation efforts.
Payments is still the biggest and most mature field within fintech. Changing consumer behavior, eCommerce, smartphone adoption, digital currencies and PSD2 are just some of the trends that is making payments ripe for disruption. As the competition intensifies, margins are under pressure, and payments is merely an entry point to the banking sector. iZettle has expanded into lending, and several challengers coming from the payment side are now applying for a full-fledged banking licence. Klarna received its banking license in Sweden earlier this year and Square has filed an official application for a US banking license, proving the need to become a bank in order to fulfil their potential.
Marketplace lending was once viewed as one of the business models that enabled non-banks to serve customers financial needs without becoming a bank. However, marketplace lenders have despite having lower legacy than banks proven to be at a cost disadvantage compared to traditional bank in order to reach significant scale. The cost of capital as a marketplace lender is significantly higher than the cost of capital with a traditional banking license. As a result, peer-to-peer lenders such as Zopa are now applying for a banking license to launch a retail bank alongside its core peer-to-peer operation.
The benefits of being a bank has also encouraged challenger banks to pick up the mantle and compete head on with behemoth counterparts. With little to no legacy and an open platform, challengers like Starling, Monzo and N26 focus on creating a state of the art digital user experience as competitive advantage, while offering complementary products and services from strategic partners as part of the customer journey.
Incumbents have in no way sat idle by to watch this development unfold, and are starting to adapt to a changing landscape for financial services. In the regard, the big uncertainty is whether banks are ready to put their money where their mouths are and start innovating at the core of their business models.
Even though it has proven more cumbersome than anticipated to eat the banks lunch, that should be no excuse to rest on ones laurels. Even though fintechs could be viewed as a source of innovation rather than an existential threat, Facebook, Alipay and Amazon are still looming on the horizon as the real concern for incumbents.
Where fintechs have pivoted towards collaborating with the banks or becoming banks themselves, online platforms as Facebook have a different starting point, as they are omnipresent in our everyday lives. Tech giants excel at digital service design and convenience, but still lack the trust represented by the banks. However, tech giants already define customer expectations, and will surely give the banks a hard time if they choose to offer digital banking services as part of their platforms.
The Norwegian fintech scene has grown from a modest infancy to a force to be reckoned with in only a few years. In order to utilize this potential we have decided to establish the association Finance Innovation with the main objective to build a global fintech hub. Behind the inititive is more than 20 key finance and tech companies in Bergen. The cluster will act as a catalyst to launch new initiatives in research, education, innovation infrastructure and internationalization.
The landscape for financial services is changing, and the sum of regulatory changes such as PSD2 and MiFID 2, new technologies such as blockchain and artificial intelligence, changing customer behavior acts as a catalyst for new business models and services in the financial sector. As a result, global investments in fintech between 2010 to 2016 has accumulated to USD 70 billion with an expected return on investment of 20%.
In addition to an already thriving fintech community, the external conditions are provide a favorable breeding ground for digital innovation in the financial sector.
The financial sector in Norway have a proven track record to collaborate to innovate, and this has provided the financial sector a scalable digital banking infrastructure. The cost of providing retail payments are ranked as the third most cost efficient in the world, at 0,49% of GDP. Cross sector collaboration also enables the necessary data exchange to provide fully digitized processes for products such as mortgages as well as automated compliance reporting.
Looking at the Norwegian fintech sector, the trend seem to be following this formula, where a significant amount of fintech companies from Norway are focusing on delivering turnkey solutions to the banking sector. Some notable examples of fintech and bank collaboration originate from the founding members of the fintech cluster.
Skandiabanken has invested in Quantfolio to develop a robo-advisory service. Digital savings and asset management is one of the arenas in which Norwegian fintech companies has a large potential to succeed beyond our national borders, and Skandiabanken aims to take a part in this. As a major shareholder in Quantfolio Skandiabanken will utilize the competence and know-how that is present in the company as part of our increased focus on long term savings. We will also add required competence and act as a professional financial owner for Quantfolio to succeed both in parthership with Skandiabanken, and as a stand-alone fintech company.
SpareBank 1 SR-Bank has invested in both Boost.AI, a leading company in natural language processing, providing virtual assistants to the financial sector as well as Vester, a marketplace-lending platform for banks. SpareBank 1 SR-Bank is developing a crowdlending platform directed at SMEs in collaboration with Vester.
Nordea is collaborating with fintech-startup, Spiff in order to make savings fun and social.
These are just some examples, and the commonalities is the ambition to benefit from collaboartion with Norwegian banks as a starting point before expanding globally. Other key stakeholders are DNB, Tryg Forsikring, Monobank, Sparebanken Vest, Tripod, Stacc, Knowit and Webstep. Academic partners include NHH Norwegian School of Economics and the University of Bergen.
The possibilities to benefit from the changes ahead are vast, and collaboration is imperative to release the full potential of Norwegian fintech. Establishing a fintech cluster acts as a competitive advantage in order to reach a global scene for all stakeholders, both incumbents and startups. The cluster also benefits strongly from the contribution of strong and dedicated knowledge partners, along with a growing portfolio of private investors. By utilizing strategic resources, a Norwegian fintech cluster has all the prerequisites to become a significant international hub.
This is a guest post by TheFactory FinTech Accelerator. Skandiabanken is a partner of TheFactory.
The Nordic fintech scene is growing fast in terms of number of startups and investments and innovative and ambitious startups are popping up in all of the major cities.
TheFactory – a Nordic Fintech accelerator and incubator based in Oslo, Norway, is observing the scene closely. Running 12-week accelerator programs tailored to fintech startups, TheFactory (aka FintechFactory) helps participating startups go to market faster.
The aim of the accelerator is to help ambitious Fintech entrepreneurs off to a good start.
Need help early on Starting and launching a successful fintech is an immense exercise, in particular due to heavy regulation and the complexity of the landscape. Startups approaching TheFactory are typically in the seed stage and one of two kinds. The entrepreneurs either have industry experience but lack startup experience or visa versa.
TheFactory has built a versatile rig of more than 20 partners, 60 mentors and 25 investors to help startups bridge the gaps. We find that acceleration typically occurs when you couple industry experience with outside thinkers. For example when a team of young and bold entrepreneurs is matched with a mentor that knows the banking or insurance business in and out and can guide them right and open doors to the decision makers. Similarly, when a team of industry dropouts – now entrepreneurs – are coupled with design thinkers and agile developers. It is these kind of cross-overs that spur innovation.
Leveling the playing field throughout the accelerator programs, TheFactory facilitates meetings and interactive workshops between the startups and the established industry. A few years ago it would be unthinkable for an early stage startup to spend time with top level management of a bank. But times are changing. Banks and Insurance companies are coming to realize that they are forced to innovate to stay in business, and more and more they are looking to source innovation through ecosystem partnerships. The startups on the other side often seek industry partnerships to get distribution fast.
At TheFactory, the startups get a chance to meet the decision makers face to face. Recently they met with the CDO of Skandiabanken, Christoffer O. Hernæs who carme to share insights on the banks open innovation efforts. Nordea's CEO, Casper von Koskull came for lunch – eating hotdogs with the entrepreneurs! Several of the Spring startups have already or are about to enter into (pilot) partnerships with a large bank after only few months in operation.
Industry focused hubs and accelerators like Stockholm and Copenhagen Fintech Hub and TheFactory in Oslo create arenas for exploration and innovation and shortens the distance between fintechs and incumbents.
TheFactory is open for applications through August 3rd. Startups seeking industry partnerships, mentoring and seed investments are encouraged to apply. For more info and application see www.thefactory.no
By now, almost everyone in the banking industry agrees that we are facing a perfect storm of changes that will forever alter the landscape for financial services. However, it still seems like a long way from talking about it to acknowledging the potential threats and challenges. And an even further way towards putting that knowledge into action.
Bank and fintech collaboration is all the hype these days, and everyone celebrates every time incumbents hands out prizes for startups engaging in a corporate accelerator or wins a pitching contest. But banks have a lot more to offer than acting as event organizers for the startup community. Banks have capital, a vast customer base, trusted brands and the know-how of how to build scalable financial business models.
As a result, and we are seeing some pioneers like CommerzVentures (the venture investment arm of Commerzbank) who stated that Banks were too focused on protecting themselves from a repeat of the global financial crisis that they missed many investment opportunities offered by key startups. Goldman Sachs, Citibank and Banco Santander lead the way in terms of investment volumes. BBVA has been on a steady shopping spree for a while by actively both investing and acquiring fintech startups like Simple, Holvi and Atom Bank. Polish bank mBank has set aside 50 MEUR to invest in fintech startups, to both enhance their own mobile offering as well as commercialize the solutions globally in the next phase. These are just some of the examples, and a report by KPMG and CB Insights are pointing out that early stage funding of fintech startups by banks is on the rise, and corporate venture made up a third of total fintech investments in Q2 2016.
Despite these trends, banks miss out on fintech investment opportunities according to another report by Boston Consulting Group. The vast majority of the funding goes to payments and alteative lending, while areas like capital markets remain to a certain extent untouched by banks. According to BCG, enormous opportunity exists from the collaboration of established capital markets players such as investment banks with young fintech companies, but the potential is far from being realized.
Herein lies one of the key challenges of the innovators dilemma, as incumbents often tend to seek innovation that builds on the edges of existing business, rather than challenging one’s own core business models through new technology. As a result, many banks will be content by running a couple of innovation jams, putting out a #fintech newsletter on the intranet, but deep down hope that in the end everything will go back to normal as soon as the transition to mobile payments is done.
On the other hand, banks that are willing to invest and place some bets on actually challenging the industry will have everything to gain. With that in mind, action speaks louder than words.
The landscape for financial services is changing, and the jury is still out as to how the endgame is going to play out. One of the concepts shaping this future is open banking. This development emerged out of the payment area where a perfect storm of shifting customer behavior, regulatory changes, the threat from the tech behemoths like Facebook, and the quest for new business models are driving banks towards open banking.
After looking into the subject, it is becoming clear that there is no one size fits all open banking strategy. Rather, there are several tactical moves that are being played aout by a variety of both banks and fintechs. I will attempt to describe some of the widely applied moves, as well as give some examples of type of players that are conducting theses moves.
Move #1 The API marketplace
Becoming a fintech app store is for many banks the prefered alternative to open but, but still maintain control over customer relationship and customer data. BBVA pioneered this move though their API marketplace, and has seen several followers. Nordea recently announced that they will launch a fully functioning developer portal and community hub as a first iteration of their open banking strategy. The move makes Nordea one of the first movers in the Nordics to openly state their Open Banking vision. This is not limited to big banks, as Starling is launching an API marketplace of their own. Starling’s public API enables third-parties to access customer data and build on top of the Starling Platform to create products and services such as chatbots, spending analytics, or connections with the Internet of Things.
Move #2 The account aggregators
The ability to create a unified overview of your bank accounts is for many one of the key strategic possibilities under the XS2A rule in PSD2. This move need no further elaboration, as we already see examples of players like Swedish fintech-startup Tink attempting to gain an early position through «screen scraping» prior to PSD2. In order to succeed in this game, a contextual relevant user experience is crucial, and merely presenting aggregated account balances in a retrospective fashion will not make the cut.
As the directive gets implemented, this is likely to become the new normal for every online and mobile banking service out there, effectively shifting focus for banks from attempting to be your customers main or only bank towards attempting to be your customers favorite bank.
Move #3 The trusted financial advisor
Building on the account aggregator, the trusted financial advisor also includes data from other sources such as rewards and loyalty points, utility bills, insurance, total cost of car ownership. The ability to give a holistic view of everyday finances will further strengthen the customer relationship. Op Financial Group in Finland is following this strategy, and has launched an electric car leasing service. Players seeking to follow this move should also be prepared to include competing products and services from competitors if these are the best solutions for the customer in order to build and maintain trust.
Move #4 Cross industry collaboration
Hana Financial and SK Telecom in South Korea has formed a joint venture with the goal of developing a mobile financial services platform. The joint venture is aiming to combine SK Telecom’s mobile technologies and big data analytics with Hana Financial Group’s experience in financial products and mobile financial services to build an open fintech ecosystem. When launched, the platform will offer a variety of mobile financial services – such as payments, remittance and asset management through a single mobile app. Norwegian banks and Telenor previously attempted to collaborate on the mobile payment platform Vayou, as well as Polish bank mBank has launched a mobile banking services directed at SMEs in collaboration with Orange.
Move #5 Hackathons/crowdsourcing
Opening up and allowing approved third parties to build innovative solutions on top of various banks APIs has become a popular choice to test the waters before moving towards the open banking deep end. But hackathons can also be used beyond simple exploration. ICICI Bank in India is now hosting their second season of their «appathon». The mobile app development initiative offers access of over 250 diverse APIs from both ICICI Bank, IBM Bluemix, VISA and National Payments Council og India to the participants. The programme aims to create the next generation of banking applications on mobile and web space by attracting developers, technology companies, start-ups, technopreneurs and students across the globe.
Move #6 Bank/fintech collaboration
Almost every open banking initiative has some element for fintech/bank collaboration. In order to distinguish this as a separate move I am specifically addressing bilateral collaboration efforts between one single bank and one fintech. The Financial Brand has provided som good examples of how BBVA and Dwolla collaborates on payments, USAA collaborates with Coinbase to include cryptocurrencies in their product offerings. Here in the Nordics, the latest development is a collaboration between Nordea and fintech-startup Spiff, which aims to make savings fun and easy.
Move #7 Banking as a service
For many incumbent banks, the idea of becoming a wholesale provider of commodity utilities is considered a worst case scenario.However, this is absolutely a viable strategic option for some. Germany-based Solaris bank was the first to provide a fully licensed banking platform aimed at fintechs. The platform offers payments, transaction services, deposit and credit services, as well as compliance and KYC/AML solutions. Privatbank in Ukraine is offering a similar service through the Corezoid process engine. Railsbank in the UK is another banking as a service player that provides finTech companies a range of wholesale banking services, including IBANs, receiving money, sending money, converting money, direct debit, issuing cards, and managing credit through APIs.
Move #8 The white label product vendor
Similar to providing the whole bank as a service, some banks and fintechs have partnered up with the bank as a silent white label provider of products and services that often require a banking license to deliver. Notable examples include Webbank in Utah issuing loans for P2P lenders like LendingClub and Prosper as well as providing lines of credit for Paypal. As a result, Webbank was able to generate a return on equity of 44 percent based on a profit base of only $15,5 million. CBW Bank was also a fairly unknown bank out of kansas before it was known as the initial bank partner for Moven.
Move #9 Openness at the core
In order to build an open, fully digital bank, legacy core banking systems is often pointed out as one of the key obstacles. These systems are closed and monolithic by nature, while open banking requires openness and real-time processing. Though Machine is building their core banking solution on a blockchain-style technology that is said to be ideal for interfacing with open banks. Temenos has also established a marketplace in order to connect fintech providers to financial institutions using Temenos banking software.
No matter which strategic option(s) you choose to follow, open banking will fundamentally change banking the same way internet banking once did. As banks become integrated parts of digital ecosystems, the distribution of banking products will change and in the end become more valuable in the right context for the end customer.
Rumors of competition from the technology sector has been going on for a while in the financial industry, and of the four horsemen of tech (Google, Apple, Facebook and Amazon) most attention have been devoted to Apple and Google ever since the announcement of Google Wallet back in 2011. Since then, Google has also launched Android Pay, pivoted Wallet towards a pure peer-to-peer service, Apple has launched Apple Pay, and numerous surveys are telling us every other year that consumers are ready to do their banking with Amazon, Facebook or Google.
While a lot of attention has been focused around the payment space and payment revenues at risk, the fierce competition in this space will most likely render payment process a commodity. The two biggest hurdles for tech companies when it comes to entering finance however are extensive regulations and potential low margins. The regulatory burden may still be an obstacle for Amazon, but Amazon has been following a low margin strategy as a competitive advantage for years.
Amazon is already experiencing significant growth in the payments space, with 33 million active users and 200% year-over-year growth in merchants adding the “Pay with Amazon” buy button to their online stores. As a comparison, Alipay has more than 450 million monthly active users and has more than 50% of the online payments market in China. Despite high growth rates, Amazons biggest weakness is that they are perceived as a direct competitor by other online retailers.
Amazon has also been providing credit card services for a while and now it is stepping up its efforts thought Amazon Prime Rewards credit card which gives 5% back on all Amazon.com purchases, 2% back at restaurants, gas stations, and drugstores, and 1% back on everything else in order to increase usage. To further boost growth, Amazon announced at last year’s Money 2020 Europe that they are contemplating acquisitions in the payment space.
Last year, Pay with Amazon was rolled out across Europe, allowing users to pay for non-Amazon purchases including government services, insurance and travel, using their Amazon login on thousands of third-party websites resulting in nearly doubled volumes. This is undoubtedly a valuable strategic position while we wait for the introduction of PSD2.
However, payments are just gravy for the banks. The majority of revenues in the banking sector are generated through net interest income, and this is where Amazon stands out compared to its tech counterparts. Just like Ant Financial , Amazon has expanded their supplier finance program in order to better server SMEs. According to an Amazon press release, the Amazon Lending division has provided loans to enable SMEs to grow sales by an estimated $4 billion. The Amazon Lending division has issued loans totaling over $1.5billion, with a total outstanding loan balance of $400 million.
Amazon also has a proven track record when it comes to transitioning to new business areas by successfully pivoting from the traditional marketplace as core to Amazon Web Services, which is now Amazon’s most profitable segment.
Just like Wechat is one step ahead of Facebook, Amazon is playing catch-up to Alipay in the fintech space. Amazon may be the first western tech giant to fully enter finance, but they will still be doing this years after Alibaba and Ant Financial.
Even though Google, Apple and Facebook are more visible in the payments space, Amazon differs from these players by relying on a low-margin business model with the ability to deliver payment services at a zero-marginal cost, affordable loans for SMEs and no-frills current accounts for both businesses and consumers. Technology may be the driving force behind the disruption of financial services, but it is business models that disrupts incumbents.
This is a guest blog post by Thomas Brand, management consultant at Accenture.
The traditional defense for human financial advisory boils down to a deep faith in the excellence of human reasoning and intelligence, coupled with more or less positive view on the emotional capacity and intuition of human beings. Most people who believe in human financial advice view it as an indisputable fact. The argument for human advantage is similar to the “god-of-the-gaps” reasoning, for the people familiar with some philosophy of religion. Many public arguments are based on a fallacious view of technological progress; it’s argued that robots and software agents can’t do this or that at the moment, and therefore it can be argued that it’s highly improbable that anything remarkable will happen in the near future. “Robots don’t have gut feelings, so they can’t make ‘soft’ decisions. Sometimes you just need to act even if you can’t immediately justify your view on certain issues. You just… feel that it’s the right thing to do,” some advisors might argue.
It’s true that for a long time, portfolio management, asset management, wealth management and financial planning have been exclusively done by humans, aided by software and mathematical modeling, and these different financial services have been offered as standard products (theproduct-centric view) and more or less personalized solutions (the manufacturing-centric view) for the clients. [1] This status quo has been challenged by the changing customer behavior and needs, transformation created by the new leading digital incumbents (FATBAG), the continuing blurring of industry boundaries, the transition from value chains to value constellations, the emergence of financial technology, and especially, an increasing number of robo-advisory services, perhaps redefining the concept of financial advisory altogether. Key changes have created a truly challenging playing field for the financial advisory industry, with a bunch of new and demanding imperatives when rotating to the new brave world. Multiple challenges posed by external and internal changes are forcing financial advisors to transform into something very different to remain competitive, efficient, and successful businesses.
With the emergence of simple unlinked portfolio management tools (with Mickey Mouse money) and robo-advisory, clients can now directly access semi-advanced and advanced investment and analysis tools on themselves without introducing themselves with all the nuanced details of optimal portfolio selection, factor models, diversification, hedging, and risk management. The well-known cost, time, and quality constraints that plague human advisors have shifted both advisors’ and clients’ attention towards better, more advanced alternatives. From the sales point of view, robo-advisors can serve as a tool for better sales support, increased sales performance understanding, and improved sales force effectiveness and productivity. For clients, though, robo-advisors serve can serve multiple difference purposes as for example many low-income individuals it can be very hard to meet the criteria and minimums imposed on customer profile and investable assets.
For example, Nordea Bank, a Nordic financial services company, has recently established 34 Premium branches in Finland for affluent customers, who have at least 100 000 euros in investible assets. Someone could point out that 100 000 euros isn’t actually very high threshold but at least in Finland, it actually is. For small investors, this kind of thresholds might not be so repelling aut for the robo-advisor these kinds of boundaries and constraints create real potential for growth in terms of customers and assets under management (whether we talk about challenger’s or incumbent’s digital wealth management offering, e.g. robo-advisors). If a robo-advisor has an attractive value proposition, coupled with some kind of human advisors (so-called hybrid advice model), the probability of adoption could rise even faster. Furthermore, robo-advisors are embraced by semi-DIY investors because they could now primarily focus on formulating more high-level strategy, and they might not actually be interested so much in tax planning, financial advisory, and estate planning. If these semi-DIY investors need some extra services, they most probably will focus on finding best-of-breed services from a wide variety of potential service providers. [2]
While it is relatively easy to point out that robo-advisors will (eventually) replace human financial advisors, Accenture’s recent report argues how in the alternative scenario, based on cognitive computing and smart machine interaction with humans, there is “a way to get customers and financial advisors acclimated to working with machines that can enhance and extend human performance.” This scenario posed by Accenture is not based on a bit erroneous either/or thinking but restates the fact that there probably are areas in the “client-advisor relationship […] that should remain the province of the financial advisor for the foreseeable future.” Accenture states that even though, “competition, innovation and new technology will dramatically increase robo-advisory capabilities in the near future, personal connections will [still] remain essential.” It could be argued that technology-driven robo-advisors are just one phase in the evolution of robo-advisory, and standalone robo-advisory might actually be replaced by different kinds of hybrid advisory models as investors while embracing the new possibilities robo-advisors offer to them, still might need personalized assistance from their service providers for guidance, validation, and more complex financial planning.
In practice, this means that the traditional roles of financial advisors such as “reassuring clients through difficult markets, persuading clients to take action and synthesizing different solution [options – all still human activities – will be preserved].” Therefore, at the moment, robo-advisors can mainly only complement the role, capacity and value of human financial advisors and robo-advisors are not able to eliminate them from the trust equation. The hybrid advisory model holds a great potential, and there are already many U.S.-based financial services companies offering at least some kind of version of this specific service model. The hybrid model is much more imaginative than just going fully robo or fully human, and by eliminating more mundane routines and practices with the help of lean thinking, it’s possible to leverage on human-machine interaction even more. The Senior Vice President of Schwab Wealth Investment Advisory’s Tobin McDaniel, through quite positive on the prospects of robo-advisory, claimed in an interview with Financial Times, that there are those volatile times when people just want to have a chat with a professional in order to avoid “emotional decisions that [investors] regret later.”
Echoing the ideas put forward by David H. Maister, Charles H. Green and Robert M. Galford in their book The Trusted Advisor (2001), trust is defined as an equation:
What I predict robo-advisors will do, though, is that if the traditional financial advisors do not embrace the new by being more honest and open (credibility), demonstrate dependency and consistency (reliability), try to be more empathic and discreet (intimacy), and reduce their transactional mindset and change from “I” to “we”, they will simply become obsolete. Robo-advisors will allow human financial advisors to craft more credible value propositions and cut down unnecessary and often baseless sales pitches. Robo-advisors will allow sales force to substantiate their claims, display multiple backtested scenarios and present alternative courses of action, and face the cost competition and demands for transparency and openness more proactively.
There is no magic bullet to make this happen but the customer has to come first, always. Robo-advisors can help financial advisors to better understand, recognize and respond to their customers but in the end, everything boils down to individual behaviors and attitudes towards the clientele. For example, a Finnish startup company based in Oulu, Taviq, has come up with a tool for private bankers to understand their customers better so that they can communicate the clients in a way they prefer, address what is important to them, etc. before private bankers meet them. These kind of tools, although not robo-advisory as such, are a great example of incremental continuous improvement in some aspects of the customer operations. Taviq’s solution is a great statement of the need to understand, and to be trustworthy in the eyes of the consumers and other relevant stakeholders (the trusted advisor).
Just think for a moment about the possibilities when robo-advisory is combined with personalized communication, enhanced with advanced personality analysis and investor profiling, and a human financial advisor assisting the clients throughout their individual investment journeys. As Deloitte’s recent report on the evolution of robo-advisory capabilities points out, “The trick is to choose the best approach to integrate this technology. Comparing, evaluating, and analyzing Robo-Advisory companies and their different business models is a complex task.” According to Advicent Solutions’ Patrick W. Hannon, “Robo-advisors will force advisors to use technology to add value to their services. I see a gap forming between advisors who don’t offer digital engagement/value to consumers with those that do offer tech.”
At the moment, the capabilities and implementations of robo-advisors are still its infancy (although their impact is also being felt). As for today, a typical robo-advisor employs a relatively simple questionnaire-based client profiling, goals assessment, and suggests an investment strategy follow through. When this is done, an asset allocation is proposed, adjusted and implemented for the customer. Robo-advisors can take make reactive or proactive changes to the allocation and rebalance the portfolio based on the customer’s individual investment and risk preferences as well as the return on the investment they desire. Although robo-advisors have the technical and functional ability to create a mixed portfolio consisting of equities, bonds, mutual funds, derivatives, etc., most of the current service providers are relying on cost-efficient ETF and index fund portfolios.
With the help of a robo-advisor, customers have the freedom of choosing between different offerings with different investment styles, e.g. passive, active or semi-active (enhanced index). But the major advantage of robo-advisors is not their advanced user interfaces, portfolio simulation tools, productized portfolios, etc. as people have had these at their disposal for a very long time already. The major advantage is that the advice is distributed through digital channels, and there is no need for time-consuming human interaction to manage the portfolio. Wealthfront’s past CEO Adam Nash said in February 2016 to Financial Times that automated service shines in the times of volatile markets. “The beauty of the computer is that it doesn’t care, it’s open for business every day”, Nash stated.
In a report published by Deloitte last year, robo-advisors are classified into four broad and highly simplified categories (see the picture below). Deloitte also describes different service providers at the high level; what kind of service they provide, what are their capabilities in terms of specific class and what is their offering. In another report, Deloitte has also strongly emphasized the way investments into the robo-advisory capabilities and resources can, in addition to their innovative potential, actually cut down costs and bring efficiency gains. It’s not totally clear to me, how these different generations of robo-advisors (and other digital wealth management solutions) are actually linked with the cost-income ratios and operating expenses but it can be relatively safely assumed that there is no one-size-fits-all way of calculating this as business models and operating models can be very different between the players (and therefore, e.g. efficiency gains, can be hard to estimate in the beginning of the journey).
Robo-advisor 1.0 is the most simple species of robo-advisory in Deloitte’s robo-typology. The client is served with a “single-product proposals or portfolio allocations based on listed investment products”. Wealth managers or broker-APIs are not involved in the end-to-end process so basically there is no real-world transactions taking place through the robo-advisors as clients have to buy and manage their real portfolios through their brokers. Product universe is fairly limited in terms of objectives and scope.
Robo-advisor 2.0 is a bit more advanced as “investment portfolios are created as a fund of funds” and the range of additional brokerage services is wider. Portfolio allocations are realized on a manual basis by investment managers. As discussed above, the focus Robo-advisor 1.0 and Robo-advisor 2.0 is mainly on the reduction of fees and margins, while increasing transparency and scalability of these robo-solutions.
Robo-advisor 3.0 is an advanced version of Robo-advisor 2.0 as now the “investment decisions and portfolio rebalancing proposals are based on algorithms” so that portfolio allocation is more in tune with the personal preferences of the customer. Although pre-screening and investor profiling is still based on more or less time-consuming static questionnaires, there are service providers which base their profiling on more advanced tools and processes. The investment process of Robo-advisor 3.0 is not fully automatic as the key decisions are still made by professional portfolio managers but there is more space for engagement between the robo-advisor, the human financial advisor, and the client. Some service providers will allow the investor to accept or reject investment proposals based on pre-defined investment rule sets.
Robo-advisor 4.0 is currently the most advanced form of robo-advisor as they utilized sophisticated risk management and advanced data gathering methods. Clients have the possibility to empower the robo-advisor to take the lead and make dynamic shifts between different asset classes according to changing market circumstances. In the context of Robo-advisor 4.0, the client can provide feedback to the robo-advisor based on “profit, risk appetite, and liquidity aspects” and the robo-advisor can also provide valuable insights to individual investor behavior, e.g. how to avoid losses in the volatile market conditions and leverage investments with the help of more complex financial products.
So what about those miraculous human capacities, which include the design of an optimal, profit-maximizing portfolio and sustaining trusted client relationships? I think that there will always be a place for human-based financial advice and wealth management services. However, even in the case of human-first advice, there is still a room for improvement via embedding robo-advisory and other digital tools as part of the financial services offering.
As Accenture’s report from 2015 argues, in the short term, an increasing pace of innovation and competition, mainly driven by the emergence of new digital technologies, will result in increased capacities and improved functionalities of robo-advisors. In the future, new generations of cognitive robo-advisors will be able to make more accurate decisions in much more complicated situations by proactively learning appropriate responses based both on how things went in the past (e.g. market behavior, client actions) and on their enhanced abilities to “learn on the run” (i.e. backtesting, expanding/contracting the universe of the securities ad hoc). At the moment, some robo-advisors are able to translate certain behavioral characteristics into investment plan and assimilate more complex goals into concrete action plans, e.g. adjusting the investment plans in the case of significant changes in the account balance and/or the value of the portfolio. As Accenture’s report points out, in the future, robo-advisors could potentially even help with complex tax planning and provide client’s more nuanced information about their financial behavior and actions. Although not stated in the Accenture’s report, it’s quite probable that we will witness the rise of the more sophisticated generation of integrated financial robos, which can provide a holistic overview of multiple portfolios, composed of very different asset classes, held at multiple financial institutions all around the globe.
One thing that I personally like about automatic services in general, and in robo-advisory in particular, is cleverly highlighted in the Accenture’s report mentioned above. I am very eager to “investhack” myself, i.e. I want to be a better investor today than yesterday, and the only way to be better is to better at learning. I hope that in the future robo-advisors will allow me to learn more about myself (both as a person and as an investor), and “to chart [my] own path [and to collaborate with other investors as well].” The growth path of an investor will become much more personalized, and due to new digital tools, investing will hopefully become less intimidating and more interactive with the help of new technology and digital solutions. Hopefully, wealth managers and financial advisors, will catch up with the ongoing changes and will be able to tune their value propositions accordingly.
What’s your take on the evolution of robo-advisory and its current capabilities? Can incumbents and challengers cooperate or will there be fierce competition between the two? Do you believe that the hybrid advice is a desirable goal at the moment? Do you see certain players already knocking at the frontier? I’d be happy to hear your ideas and thoughts in the comments.
To be continued…
[1] Many financial advisors and planners around the globe have already embarked their transformative journeys in order to move from the pure product-centricity towards more customer-centric models, adopting industrialization-led mindset. Their journeys to the new are and will be very different as the scope, pace, and nature of their transformation are based on diverse scenarios.
[2] A service logic and service marketing researcher working in Finland, Mr. Gustav Medberg, is currently pursuing very interesting research on the client mindsets in the context of financial services industry. As I understand his research, there are roughly two kinds of mindsets that clients have, the centralize mindset (i.e. acquire all products and services (preferably from a single provider) and the decentralize mindset(i.e. acquire different products and services from the best of breed providers).
Disclaimer: This article is based on the authors observations, thoughts, discussions and readings. Any views, opinions or conclusions expressed in this article are strictly personal. This article does not necessarily reflect the views or positions of Accenture or affiliated/related companies. The author has not received any financial or any other compensation for mentioning specific firms, services and/or individuals in this article (and mentioning these does not imply that they endorse the content of this article).
The landscape for financial services is changing, and while some trends stand out as inevitable, the endgame is still unclear. Not long ago, fintech was an obscure topic that only a few of us actually cared about. By now, fintech has exploded as a mainstream topic with an increasing level of interest from the general public. This post may not propose any revolutionary new insight, but in order to better navigate in uncharted waters it is often useful to conduct an overall assessment of the status of fintech and digital banking.
Fintech is not one single discipline, but a collective term describing different ways of improving and/or disrupting traditional financial services through use of technology, hence the term FinTech.
Payments is still the biggest and most mature field within fintech. Changing consumer behavior, eCommerce, smartphone adoption, digital currencies and PSD2 are just some of the trends that is making payments ripe for disruption. This used to be a field of opportunities for promising startups, and has given us successes such as Klarna, iZettle, Square and Venmo. Now this field is gearing up for a clash of the titans, where fintech challengers like Klarna and Transferwise face off with tech behemoths like Facebook, Apple, Google, converging industry players from the telco and retail industry, incumbents from the payment industry such as Paypal, Visa and Mastercard, the banks and Alipay as the dark horse in this battle royale for the future of payments.
What are they trying to solve?
The digital payment infrastructure varies across countries, and where the Nordics are nearly cashless, cash is still used extensively in countries like Austria and Germany. Regardless of digital maturity, there are still some fundamental issues to be solved. Even with card payments, there are still several areas where there is unnecessary friction in the payment and checkout process. New solutions aiming to reduce friction will enable digital retailers and merchant to increase conversion rates, thus creating opportunities for payment service providers that focus on convenience and simplicity. Cross-border payments and remittances are slow and costly, and innovators are attempting to reduce transaction cost and deliver near real-time clearing and settlements. Payments is the first step towards financial inclusion, and mobile solutions like mPesa and Easypaisa is providing basic transaction banking services to the unbanked in countries like Kenya and Pakistan.
However, the main reason why payments is the main battlefield in fintech is the fact that payments is the entry point for further disruption. According to McKinsey, 80 percent of customer interaction with their banks is through paying for goods and services. Controlling the payment interface will give an unprecedented leverage for intermediation of transaction banking. Facebook is one such player, who is in a unique position to disintermediate retail banks as a digital ecosystem built on the digital identity of every user in its user base, with the ability to evolve alongside changing user behavior.
iZettle has expanded into lending, and Klarna is already utilizing their strong position within digital payments to become a full-fledged retail bank. Payments are key to acquire crucial customer data, which will be used for both risk and credit assessment, as well as data-driven product development and new business models. EU’s payment directive, PSD 2 will further strengthen this trend by requiring banks to allow users to initiate payments and access their own transaction data through third-party solutions.
For more insight on payments, check ou these posts. Make sure to subscribe and stay tuned for my next update on where we stand on savings and investment trends.
Another exciting year for fintech has passed, and I will once again attempt to say something about the how fintech and the future of financial services will develop in the coming year. By now it is clear that the changing landscape for financial services is an evolution rather than a revolution, and many of these as well as my 2016 predictions will have a long-term perspective before we see any potential impact. No matter the case, attempting to predict the future is a surefire way to being wrong.
The battle for mobile payments wages on, and the jury is still out on who will emerge as victorious out of this space. Alternative finance and marketplace lending lost some of its luster last year, and what’s in store for 2017 could go either way. Insurtech is on the rise, but is still at an early stage.
Blockchain became mainstream in 2016, and will surely maintain much of its appeal in 2017. However, the interest may come from other sources than banks, such as the music industry. My friends at Dailyfintech.com even predicts that 2017 marks the end of the bank-driven phase of blockchain. The attempts by banks to coopt blockchain were like music CD retailers getting together to run MP3 music sharing sites or Post Offices setting up email services. The defections from the R3CEV consortium signals the end of this phase.
SME and business banking is ripe for disruption. The majority of fintechs has so far focused largely on retail banking and consumer-facing application, which is already a highly-saturated market. We should expect to see both incumbents and challengers targeting SMEs with digital only solutions that are designed to reduce friction in everyday banking and accounting for small businesses.
Collaborators becomes partners. As fintech companies has transitioned from challengers to collaborators over the last couple of years, the next natural phase is to formalize those relationships as strategic partnerships where fintech companies take on a vendor role towards the banks. These B2B relationships will require a different approach to growth and competence, where trust and resilience is favored over coolness and rapid user adoption.
Traditional banking software vendors are the new targets of disruption by fintech companies as a result of banks partnering with fintechs. Fintech startups have so far been focused on innovating around the traditional core of banking. However, fintechs are targeting core banking software and challenging the hegemony of traditional core banking vendors.
Artificial intelligence has been one of the hottest trends in the digitization of banking for a while now, and is showing no signs of cooling down. Most banks are already well on their way with robotic process automation, and this is only the beginning. AI is set the affect almost every aspect of financial services, and it is inevitable that intelligent automation will displace many of today’s banking jobs.
Open Banking should by now be a familiar concept for everyone in the financial services industry. Last year I said that Open APIs will become the norm for incumbent banks, and in order to stay relevant banks should offer APIs for third party integration. In 2016, the details regarding PSD2 implementation was revealed, and it became clear that banks opening up their APIs is inevitable. There is still much uncertainty regarding the future landscape of financial services, but it seems like a safe bet that successful banks will become open platforms in that future.
Security and privacy will become even more important with the promise of open APIs, intertwined digital ecosystems, distributed ledgers and machine learning based on vast amounts of data. The upcomingGeneral Data Protection Regulation (GDPR) is intended to give people more control over how their personal data is used to prevent the usage of user data without consent. The European commission has already filed charges against Facebook for providing misleading information regarding data sharing between Facebook and WhatsApp. Cyber crime is on the rise, and cyber security should be every banks top priority. Banking is built on trust, and bank-level security and transparency in use of personal data is imperative to maintain that level of trust. Fortunately, innovations in machine learning and identuty management will help cope with some of these issues.
Macro trends will impact fintech as well as the traditional banking industry. Last year UK voted leave in the Brexit referendum and Trump got elected president. 2017 may prove to be the year we see the effects of those incidents. Trump will be inaugurated as president, and the UK has announced that they will finally turn in their divorce papers with the EU. The relationship between the US and China is a play, and it is uncertain how UK free trade agreements will be solved post-brexit. The upcoming elections in the Netherlands and France are subjects of uncertainty. Consumer debt is all-time high in many economies, and it is expected that interest rates may rise in 2017.
Less talk, more action. As incumbents as well as fintechs are growing weary of attending the endless fintech conferences and events as well as reading the same headlines at all the fintech blogs and tech news sites, the time has come to act upon that knowledge. There are no lack of opportunities and ideas, the key is to understand which of those will benefit your customers. According to Jack Welch, there are only two true competitive advantages, the ability to learn more about our customers faster than the competition and the ability to turn that learning into action faster than the competition.
2016 has been another memorable year when it comes to fintech in Norway, where fintech caught mainstream interest. Where 2015 was a busy year for fintech investments in Norway, this is by no means slowing down and the sheer number of fintechs emerging out of Norway is accelerating at an incredible rapid pace.
2016 also kickstarted an expected consolidation in the payments space. Swedish mobile payment specialist Seamless acquired Meawallet for 5 MUSD in order to broaden their offerings in the contactless payments space . Encap Security was another acquisition case in 2016, where US-based AllClear ID, a provider of identity theft repair and credit monitoring services, has acquired Encap Security late July 2016.
The mobile payment battle wages with mCASH, Vipps and Mobile Pay going head-on in the battle to dominate everyday payments. Earlier this year, Nordea and Danske Bank announced that they will be joining forces on the mobile payment platform Mobilepay as equal partners. The initiative welcomes all Nordic banks to join in the collaboration effort. mCash from SpareBank 1 stepped up the competition by enabling payments within any social network or messaging platform. The largest retailers in Norway unveiled their plans for mobile payments with the company Retail Payment teaming up with IBM, Capgemini, Forgerock and Verifone to build a payment platform to better serve the retail industry at Money 2020 in Las Vegas this fall.
2016 was an overall exciting year for insurtech in Norway, where P2P-insurer Tribe raised 1 MNOK from various investors, and low-cost retail chain Rema 1000 moved into the insurance industry by launching an insurance line.
The venture industry in Norway is also picking up pace, and Northzone just closed their biggest fund to date with fintech as one of key verticals. The fintech ecosystem is also shaping up with a wide array of supporting players. Fintech Factory finished their first accelerator program with several new fintechs being born out of the initiative. The banks have really opened their eyes to fintech in 2016, Nordea invited 35 startups to their Oslo office for the launch of their second accelerator program in Oslo, SpareBank 1 opened their APIs and hosted a hackathon in Trondheim and DNB is launching their accelerator program DNB NXT in collaboration with Startuplab.
Even the goverment got onboard the fintech bandwagon with the announcement that Norway will follow UK in establishing a regulatory sandbox for new fintech services.
These are just some of the developments in the Norwegian fintech scene the last year in addition to more fintech events than I am able to count. I expect 2017 to raise the stakes even further with less talk and more action from both challengers and incumbents.
I’ll let this be my concluding blog post for 2016 and will be back with my predictions for fintech in 2017 as we enter the new year and I embark on the next phase of my career in Skandiabanken.
In the old world of banking, savings and investment professionals viewed the world as two classes of people, wealthy clients and ordinary people. The first category where offered wealth management services, and the latter where offered a savings account.
However, banking customers were developing more sophisticated needs and the rise of self-service investment and trading platforms captured the attention of the mass affluent segment when they arrived in the mid- to late nineties. As a result, the securities industry reached a stagnation in growth and ultimately major consolidation of the brokerage industry.
Changes in the regulatory landscape also challenge status quo in the asset management industry through MifID II and Retail Distribution Review (RDR). Key takeaways from the UK market shows that the implementation of RDR has led to an advisory gap, leaving 5,5 million banking customer “underadvised”. This strongly favors self-service platforms, and players like Nutmeg has seem tremendous growth following the implementation of RDR in 2013.
With the rise of robo-advisors and intelligent automation, asset managers and financial advisors are potentially facing the same fate as the retail stock brokers. According to a survey conducted by the CFA Institute, the majority of respondents, which included more than 3,000 chartered financial analysts around the world, view asset management as the industry most at risk from disruption by automated investment tools.
Image: CFA Institute
Robo-advisory is a fraction of the market compared to overall assets under management, but the industry is preparing for a much more competitive future. That future is one of greater choice because “robo-advice represents the democratization of wealth management,” according to Dirk Klee, Chief Operating Officer at UBS Wealth Management. Too meet this development, UBS have developed their own robo-advisory service containing investment options that were previously only available to the distinguished few are offered wo a wide range of customers. UBS recently launched online wealth manager, SmartWealth, which lets people gain access to the Swiss bank’s investment expertise with as little as £15,000 to invest. The previous investment threshold was £2 million.
While incumbents are still addressing traditional clients, the demographics and user behavior of the typical customer is changing. Marketplace lending is not only a source of capital for SMEs and individuals, but offers an additional asset class for private investors that where once only available for wealthy clients as well as receiving a AA- rating from Fitch and Aa3 rating from Moody’s on the most senior notes on a securitization of parts of the loans portfolio earlier this year.
There is also a disconnect between the rising economic power of women and the fact that women are still a disproportionately small portion of the world’s savers and investors. The rise of everyday banking services that integrate savings as a part of daily spending behavior lowers the barrier to start saving money will also have a profound impact on future customer behavior. Their high frequency, tech-savvy approach demands and uses a variety of self-service channels and services, including personal finance management (PFM) tools and financial alerts. According to Javelin research, this demographic named ‘Moneyhawks’ are the most profitable customers banks don’t know they have.
Even though much of the change is focused on the front end, it will ultimately affect the whole value chain. Low interest rates and global trends are correlating increasingly with fund performance, and explains over half the average stock returns, favoring low cost ETFs over active asset managers. As active managers are struggling to outperform the market, Vanguard is lowering account fees to as little as 30 bps, compared to 100+ bps from a typical managed fund.
There is nowhere to hide in the changing landscape of financial services, and asset management is no exception. There will still be room for the human element in asset management, but technology will play an increasingly more important role. At the end of the day, the democratization of wealth management has the potential to make previously unavailable investment alternatives accessible to a much larger market.
Core banking is considered for many as the gordian knot in the digitization of banking. As a result, a vast majority of fintech companies are innovating around the core, leaving legacy IT to the banks.
However, some entrepreneurs are audacious enough to attempt to renew core banking from scratch. I had the pleasure of meeting Tristan Fletcher of ThoughtMachine in London earlier this fall, and used the occasion to ask him a couple of questions of which problems ThoughtMachine is attempting to solve with VaultOS.
Everyone is complaining about legacy IT, but few actually spell out what is wrong with today’s core banking solutions. Which problems are Vault OS going to solve, and how does the system differ from legacy systems in terms of architecture?
New product development often suffers from inertia in the sense that every new product adds additional complexity to an already complex core. This also limits scalability in terms of number of customers and/or products. Vault OS intends to enable new product offerings with a cost that is independent of complexity, as well as providing an infrastructure that scales in terms of number of users and product offerings with minimal incremental cost.
Risk and compliance is a cost driver for every bank out there, and manual compliance reporting drives both cost as well as increasing risk due to long lead times in terms of data expiration dates. One of the key components in Vault OS is real time treasury management and reporting. In addition, cryptography and security is baked in from the bottom up, and is not just an overlaid afterthought.
Architecture in legacy IT is often prone to repeated expensive and reputation-damaging failures. Vault OS micro-services architecture is built out of many independent components and services surfaced through their own APIs. When one component / service goes down, it doesn’t necessarily impact the rest of the system. Furthermore, Vault OS’ integrated health monitoring processes recognise if a component is down and restarts it. In addition to this, Vault OS aims for a separation and genericization of products running on a common data source, the transactions ledger. This is done by leveraging a Blockchain-style centralised, permissioned cryptographic ledger for storing transactions, products (smart contracts) and actions.
Open banking is one of the most hyped stories in banking these days, how is Vault OS designed in relation to this scenario?
The federated permissioning that blockchain style technology enables is ideal for interfacing with open banks.
How do you plan to utilize distributed ledger technology as an internal part of the system?
All transactions are stored on the ledger, with each transaction being signed by the bank and one or more counterparties, and then a hashing function applied to it and the one above it in the ledger to check for integrity. Secondly all products are encoded as smart contracts and these themselves are similarly recorded in an immutable ledger. Lastly all actions that a member of staff in the bank perform, from the CFO to the cash teller, are recorded in a third ledger.
In what way will Machine Learning benefit banks running ThoughtMachine’s core banking solution?
Vault OS use machine learning techniques to forecast how the customer base will evolve as well as how economic conditions such as a changing yield curve or exchange rates might impact them to carry out sophisticated scenario planning and balance sheet forecasting. This will counteract todays myopia of consequences to balance sheet health of different economic scenarios. The single source of truth that Vault OS’ ledgers embody, enables a more holistic look at fraud in the bank based on a wide range of data: not just card fraud or payment fraud.
When it comes to everyday banking Vault OS also use machine learning to categorise every user’s transactions so that they can see where their money goes (for example x% on shopping, y% on bills) as well as being able to associate transactions with merchants where relevant. This also enables the system to predict how much a user will spend in each category going into the future.
Cloud is unfortunately still frowned upon by the FSA in some countries. From your perspective, what are the benefits of a cloud based core banking system?
A cloud based approach offers no lock-in to specific hardware which results in cheaper recruitment as well as maintenance. This also gives increased reliability, reduced friction for frequent deployments as well as built-in load balancing. A cloud-based approach also provides horizontal scalability and disaster recovery built in from the start, allowing IT costs themselves to scale with demand.
You told me earlier that ThoughtMachine is built in a modular way, allowing banks to choose any modules they want. Are these fully independent of each other or are there some core components that are necessary to tie it all together?
The system “kernel” which is essentially products, transactions, auth is required. As the whole system is API-based the rest can be switched on or off. Vault OS’ workflow system also enables flexibility with regards to external services and business processes are flexible.
Finally, when will we see the first banks taking the leap of faith and doing a core banking renewal with ThoughtMachine?
We are in the advanced stages of trials we are conducting with a variety of banks.
This is a guest post by TheFactory FinTech Accelerator. Sbanken is a partner of TheFactory.
The Norwegian fintech scene has grown from a modest infancy to a force to be reckoned with in only a few years. In order to utilize this potential we have decided to establish the association Finance Innovation with the main objective to build a global fintech hub. Behind the inititive is more than 20 key finance and tech companies in Bergen. The cluster will act as a catalyst to launch new initiatives in research, education, innovation infrastructure and internationalization.
